Working Paper: CEPR ID: DP15173
Authors: Tiago Cavalcanti; Marcelo dos Santos
Abstract: There is a large body of evidence showing that for many countries the structure of wages and pensions and the labor law legislation are different for public and private employees. Such differences affect the occupational choice of agents and might generate some type of misallocation. We develop a life-cycle model with endogenous occupational choice and heterogeneous agents to study the implications of an overpaid public sector. The model is estimated to be consistent with micro and macro evidence for Brazil, a country with a high public sector earnings premium. Our counterfactual exercises demonstrate that public-private earnings premium can generate important allocation effects and sizeable productivity losses. For instance, a reform that would decrease the public-private wage premium from its benchmark value of $19\%$ to $15\%$ and would align the pension of public sector workers with the one in place for private sector workers could increase aggregate output by $11.2\%$ in the long-run without any decrease in the supply of public infrastructure. We provide a decomposition of the aggregate effect into changes in factors accumulation and changes in TFP and implement a welfare distributive analysis.
Keywords: public-private earnings premium; misallocation; development
JEL Codes: E6; H3; J2; O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public-private wage premium attracts highly productive agents to public sector jobs (J45) | misallocation of resources (D61) |
| public-private wage premium attracts highly productive agents to public sector jobs (J45) | inefficient labor allocation (J29) |
| decrease in the public-private wage premium (J39) | all individuals better off in the long run (D69) |
| decrease in the public-private wage premium (J39) | increase in aggregate output (E23) |
| decrease in the public-private wage premium (J39) | improved productivity (O49) |